The current open outcry method of trading contracts has remained virtually unchanged since its inception over 150 years ago. Open outcry trading exchanges provide a facility in which a limited number of individuals may submit bids and offers on a particular commodity contract, and thereby serve to establish its market value or price. The ability of an open outcry market to discover prices for contracts on future delivery of commodities, and to transfer.those contracts between selected traders, has made it a valuable tool for controlling risk and speculation.
An important purpose and effect of commodity markets is to spread the risk of changing prices from a small group to a larger group, a process known as risk management. Speculators enter the market, and thereby provide liquidity for the contracts traded, when changing conditions suggest an economic benefit. As prices fluctuate, the trading of these contracts provides opportunities for profit to the astute trader. The larger the number of traders exchanging contracts, the more liquid the market is, and the greater the opportunity to spread risk of adverse price moves to other traders.
The existing system of open outcry commodity markets is, however, subject to endemic problems and shortcomings, which in the aggregate prevent individual traders from exercising well-informed control over their own activities in the trading process.
Typically each trading exchange and its members control access to the trading pits, and establish a variety of constraining procedures, including the setting of specific hours of operation, trading protocols including trading minimums, and selection of trading instruments. Confusing contract specifications and values, and complicated contract expiration dates, have the practical effect of limiting trading to the comparatively few who have the considerable time and money needed to master complexities of the trading system. Among those familiar with the trading system, those with the opportunity to stand in the actual trading pits, who are known as “floor traders” or “locals”, hold a commanding advantage over the ordinary retail trader who is several layers removed from the trading floor.
More generally, the current system of open outcry commodities markets is driven by the restrictive control that members of particular exchanges hold over access to the trading pits, and over the administrative aspects of the trading process, importantly including the procedures employed to confirm and clear trades, and to resolve disputes that arise. In the current system, exchange employees, and the brokerage firms that funnel bids to the exchanges, add many layers of human activity, and thus potential human error, between the originating retail trader and the final resolution of any trade. The advent of computers has not appreciably ameliorated these shortcomings, and all commodity trading systems in commercial use today, including so-called electronic or screen trading systems, continue to require the intermediation of a broker, telephone operator or facilitator between the individual retail trader and the trading floor, and continue to hamper direct trader access to current trading information available to floor traders who are physically located in the trading pits.
The current open outcry system of commodity markets also suffers from structural problems that derive from its origins, when these markets served a small number of participants in a localized area. As the number of traders has increased manifold, the use of large numbers of intermediaries, including brokers, “specialists”, market makers and clerks, has become necessary to the operation of the system, and the trading advantages of the floor traders or “locals” physically located on the trading floor have become considerable. In particular the interpolation of several layers of brokers and clerks separating the ordinary retail trader from the trading pit, and from other ordinary retail traders, results in substantial delays in the transmission of current trading information to retail traders and delays in the transmission of their trade orders. These delays in turn have the adverse consequences that retail traders often submit trading instructions on the basis of outdated trading information, and then submit trading instructions that are outpaced by shifts in trading prices before such instructions even reach the trading pit. The structural constraints of current trading systems also severely limit the type and number of commodity contracts that may be traded, as only commodities sanctioned by the exchange may be traded. The current system is accordingly incapable of handling in a fair and equitable manner the number of traders, and the number and types of contracts, potentially capable of being served.
The current commodity exchange systems are also fraught with opportunities for human error, abuse, and even fraud. Trades are not confirmed until the exchange has closed, in a multi-step process known as “clearing.” Trades made In the trading pit by floor traders are initially recorded by handwritten notes on paper cards, and the possibility of a mismatched transaction, or “out trade,” exists with every trade; as a result each trade needs to be physically confirmed, by a matching of handwritten trade records, as a part of the clearing process. This dearing process in turn requires the manual keypunching of transaction data by exchange employees into computers, again providing opportunities for human error. At best, those traders who have neutralized or offset their position during the trading day, and as a result may have realized net profits, will be unable to access their funds until the following day, assuming all of their trades have cleared properly. In the event of disputes resulting from one or more out trades, the retail trader must await, and abide by, the resolution of the dispute by exchange traders, typically without any input or participation by the affected retail traders. In current trading systems the details of the trading process, and the details of ongoing trading activity in the trading pits, are thus obscured from the ordinary retail trader, and in effect the trading exchange serves preferentially the interests of its members to the detriment of the ordinary retail trader.
Regarding abusive practices, the current system provides no protection against floor traders who exceed the limits of their allowed account balances, or against a floor trader's misuse of rapidly changing trading information to favor or disfavor a retail customer not on the trading floor. For example, in the conventional exchange system floor traders are under no obligation to fill orders In the order In which they were received, and they may discriminate for or against particular retail traders in the filling of bids without any possibility of detection by a disadvantaged trader. Current measures to control illegal or abusive trading practices are limited, and they are inadequate to police the trading process. As a result the individual trader is left without the assurance of a fair and level trading platform.
It is accordingly desirable for a contract trading system to be designed that would enable ordinary retail traders to trade in all currently available contracts without any reliance on intermediaries such as brokers, floor traders and other exchange employees, and to trade in security, anonymously and preferably with immediate confirmation and clearing of all trades, free of the disputes currently caused by out trades. It is also desirable for a trading system to be designed that provides each trader with equal, immediate access to all pertinent trading information. Such pertinent trading information may include current bid prices, bid volume, market depth and concentration, historical price action (including time and sales), and graphically displayed price tick data. It is highly desirable, in short, to replace existing contract trading systems, the detailed operations of which are obscured from ordinary retail traders, with a trading system that operates in a manner characterized by complete transparency for all traders.
In view of the wide availability of inexpensive personal computers, and of worldwide data communications networks such as the internet that are readily accessible to such personal computers, it is desirable to design a contract trading system that harnesses the communications and data processing power of such personal computers and data communications networks, to enable ordinary retail traders to engage freely in trading on a worldwide basis, free of the trading times and other restrictions imposed by the current exchanges, and to do so without resort to special hardware or expensive proprietary software.
There is a accordingly a need for a trading system that eliminates the disadvantages and shortcomings of the existing open outcry contract trading systems and exchanges. Specifically there is a need for a contract trading exchange that allows individual retail traders to trade for their own account directly, without the intermediation of any broker or of trading exchange floor traders or other employees. There is a need for such a trading system in the operation of which all trades are immediately confirmed, cleared and settled, and the funds allocable to traders by virtue of their profitable trades are made immediately available to such traders.
There is also a need for a marketplace in which Individual traders may proffer proposed contracts and create an array of active markets in such proposed contracts without requiring the approval of any trading exchange personnel or controlling body.
The applicant is unaware of the existence of any contract trading exchange which contains any of the above features and that addresses successfully the shortcomings of the prior art trading exchanges as described above.
It is therefore an object of the present invention to provide a trader-driven trading system, for the trading of contracts, that is fair, equitable and transparent, and that enables individual traders to trade directly (yet anonymously) with other individual traders, in real time and without any involvement whatsoever by any broker or any trading exchange personnel.
It is a related object of the present invention to provide a trading system in which all participating traders are provided simultaneously with up to date trading information (importantly including a list of all current active bids, induding price and quantity information, and the last price paid) on precisely the same basis, thereby eliminating the inherent unfairness and the potential for abuse of trading systems in which certain traders have greater or faster access to pertinent trading information than do other traders.
It is a further object of the present invention to provide a trading system whereby all trades are immediately confirmed, cleared and/or settled, and any funds due any trader by virtue of any closed trades are immediately made available to the trader.
It is another important object of the present invention to provide a system and a method for trading that employs, as a trading instrument, a novel form of contract that has a fixed face value and is formatted as a two-sided proposition which represents mutually exclusive outcomes. The form of said contracts is such that any trader may submit a bid on either side of the contract, to be matched with a complementary bid submitted on the opposing side of the contract, thereby qualifying to obtain the fixed face value of said contract in the event the “side” selected by the trader prevails over the opposing side, in accordance with preset contract termination criteria.
It is a related object of the invention to provide a bid matching system, for use in a system for the trading of contract trading instruments having two opposing and complementary “sides”, whereby bids are time-stamped on receipt and each incoming bid is compared against a stored list of active bids earlier submitted for the opposite side of said contract, and matches with complementary bids are made in the order of receipt of any said complementary bids.
It is another object of the invention to provide a means for traders who hold a “long” position, with respect to a contract traded on the trading system, to offset and “null” their long position at will, and thereby to conclusively and immediately determine and realize a gain or loss with respect to their trading on said contract, and avoid further risk. (Traders are said to hold a “long” position when their trading activity has resulted in their holding a number of matched or “filled” contracts on one “side” of a contract that exceeds their filled contracts, if any, on the other side of the same contract.) Under the system of the present invention, traders holding a long position on either side of a contract may instantly null their position, in an active market, simply by submitting offsetting bids on the opposite side of said contract, at the best prices then available to obtain the number of contract units or lots needed to null the long position.
It an object of the present invention, ancillary to the preceding object, to provide a system that, upon the occurrence of any trade that returns a trader to a null position, immediately credits or debits that trader's account with the gain or loss realized by the nulling of his or her position.
It is a further object of the present invention to provide a trading system in which bids may be acted upon immediately upon their submission to the trading exchange, and in which active bids may be cancelled instantly at any time following their submission and prior to their acceptance in any effectuated trade.
It is a further object of the present invention to provide a computerized embodiment of such a trading system in which all trading activity may be conducted electronically over a wide area network such as the internet or over a local area network, preferably using suitable cryptological means to insure secure and authenticated communications. It is therefore also an object of the present invention to provide a contract trading system that may readily be adapted for use in intranets operated in closed venues such as lounges, casinos, cruise ships, passenger aircraft cabins and the like.
It is another object of the present Invention to provide such computerized trading system that offers subscribers the capability to submits bids for immediate dissemination to all other system subscribers, and that is capable of immediately matching any such bids with any previously submitted complementary bid, or with any subsequently submitted, complementary opposing bid.
It is another object of the present invention to provide a computerized trading system comprising for each subscriber an account, funded by the subscriber, in which all pertinent Individual trading account data are stored and are automatically updated upon the occurrence of any account-affecting event, Including immediately upon any bid submission, bid cancellation or bid matching. It is a related object of the invention to provide means whereby a reserve is established from a trader's account to cover any bid made by the trader, thereby enabling trades to be automatically effectuated, confirmed, and settled immediately upon the matching of said bid submitted by the trader with an opposing, complementary bid submitted either earlier or later than said bid.
It is one object of the present invention to provide a trading system that is particularly suited for trading in contract positions during the course of a short-lived current event, such as a sporting event, which is susceptible to wide swings of opinion and risk on a minute by minute basis. It is a related object of the trading system of the present invention, wherein all trading decisions made within the system are controlled exclusively by individual traders, to provide a system for trading with respect to events verifiable by outside means, such as sporting events televised concurrently with the trading activity, that is impervious to manipulation or abuse by the operator of the system.
It is another object of the present invention to provide a contract trading system that is accessible to any retail trader having an internet connection capable of interactive graphical data communications. Accordingly the present invention provides means for each trader, upon each connection to an internet site of the trading system, to download the software needed to use the trading system, in the form of a self-launching, richly featured applet Such an applet would thus comprise a graphical user interface (GUI) that enables the trader to receive and display trading information, means to input identification information and trading instructions, including bids and bid cancellations, in a secure manner, and means for enabling the trader to obtain continual updates of trading information from the system host computer.
It is another object of the present invention to enable trading systems that may be addressed by traders operating all manner of data input and output devices, including without limitation so-called “thin clients” or “network computers”, personal digital assistants (such as the 3Com “Palm Pilot, but also including two-pay alpha-numeric pagers and cellular telephones having similar capabilities), as well as television monitors, touch screens, kiosk displays, keypads and voice command recognition devices and/or generation devices, whether currently existing or subsequently developed.
It is a still further object of the present invention to provide a contract trading exchange such that any subscribing trader may at any time proffer a new contract for trading on said exchange, and initiate a trading pit or market in such new contract, simply by publishing the desired trading proposition, in the form provided, and submitting a bid on one “side” thereof.
It is another object of the present invention to provide a parlor game in which players, having been provided with a beginning fund account, compete to maximize the profitability of their trading skills, for example as applied to an ongoing televised sporting event, or to game situations created specifically for a trading game. For this and related applications the software needed to operate the parlor game trading system may be stored on any suitable medium, such as game cards for use on popular computer game systems, or in a form downloadable from an internet site, and may be adapted to enable trading commands to be input by a plurality of players via a single or a plural input devices including keyboards, joysticks, voice commands or any other suitable means of inputting data and commands.
Ancillary to the preceding object, it is an object of the present invention to enable embodiments whereby the objects of trading are fictitious or “virtual” events, effectively gaming “games”, the flow and outcome of which may be controlled by appropriate programmed criteria to optimize gaming interest and reward gaming skills.
In addition to making possible new trading exchanges, the present invention also makes possible new and highly efficient opinion polling systems, in which both the positions of poll participants and the intensity and depth of their opinions may be evaluated on a continuous and ongoing basis in a manner and with a degree of accuracy and efficiency not provided by existing polling systems.
It Is therefore a further object of the present invention to provide an opinion polling system whereby any individual having access to the trading system may participate in polls on any matter of opinion that may be stated as a two-sided proposition having a defined termination criteria.
These and other objects of the invention will be apparent to those skilled in the art from the following detailed description of the invention, the accompanying drawings and the appended claims.